2024 ends as a hot year for industrial building completions in these two desert markets

Article originally posted on CoStar on January 15, 2025

Not only is the weather hot in Dallas and Phoenix, but the two desert markets top the nation’s ranking for industrial construction hot spots.

In 2024, Dallas-Fort Worth and Phoenix saw a combined 78.3 million square feet of net new industrial space, the most and second most in the United States, respectively. They also accounted for roughly 22% of the national total.

This data should come as little surprise to those familiar with these areas. Economic and demographic tailwinds have been driving the success of both Texas and Arizona and show very little sign of stopping any time soon. Residents have been pouring into both states at breathtaking levels, with many seeking job opportunities and affordability. This is especially true compared to many of the high-cost metropolitan areas where new arrivals are often relocating from. These trends have captured the attention of developers across all segments, but industrial builders, in particular, have had some of the strongest success over the last several years.

Despite both markets being landlocked, Dallas-Fort Worth and Phoenix have emerged as distribution juggernauts in their own right. Without direct port access like most coastal or Gulf markets, the industrial base in these two areas relies solely on their existing rail, trucking and air cargo networks. Both also benefit from proximity to the United States’ largest trade partner, Mexico, which uses these markets as vital distribution hubs to move goods across the border and then on to markets all over the country.

This has led to a boom in construction in these two industrial hubs. From distribution to advanced manufacturing for segments like the semiconductor industry, both share a very similar makeup and have been driven by many of the same elements of success.

Looking forward at what’s in store for 2025, assuming all trends hold equal, Dallas will likely maintain its top spot for completions, with an estimated 17.2 million square feet of industrial facilities planned for completion before the end of the year.

Although leading the rest of the nation, this number is a far cry from not only the most recent peak but even relative to the historical standard for this market. Between 2015 and 2019, industrial developers would add an average of 24.7 million square feet every single year, much of this simply in service for the growing population.

At roughly 95 square feet of industrial space for every resident, about 14.4 million square feet of new move-ins can be expected at any given year based on population change alone. This can be driven up or down by a multitude of factors, including the performance of local retailers, construction for residential units or new manufacturing facilities, all of which increase industrial demand. Although the current pipeline is enough to account for this natural demand, it is limited enough to give existing space a chance to compete, causing vacancy to fall for the first time since 2022 — a welcome sign for industrial owners across the board.

About 37.5 million square feet of net new industrial space was completed in Phoenix in 2024, the second most in the country. Counter to trends seen nationally, last year’s result tops 2023’s completion total of 31.6 million square feet. It also dwarfs the pre-pandemic five-year annual average of about 8.5 million square feet per year.

The Valley’s growing role in national supply chains has catalyzed construction. West Valley neighborhoods like Glendale, Goodyear and Surprise have been the primary recipients of new development, often in the form of big-bomber warehouses spanning several hundreds of thousands of square feet.

These areas benefit from ample available land, robust demographic trends and access to the I-10 and Loop 303 freeways. These two key transportation arteries link Southern California ports of entry with the rest of the greater Phoenix area, drawing strong interest from industrial users and developers. More than 9 million square feet was built within a mile of the Loop 303 freeway in 2023 and 2024 combined, on pace with the gross completion total in Reno, Nevada, during that time.

In Phoenix’s Southeast Valley, the area surrounding the Mesa Gateway Airport has been another construction hot spot. Over the past two years, more than 17 million square feet has been built within a 5-mile radius of the airport as the area continues to transform into a critical node for distribution.

Though the Valley boasts powerful long-term tailwinds supporting underlying industrial demand, the construction surge since the onset of the pandemic has put considerable upward pressure on vacancy. The Phoenix industrial vacancy rate rose from an all-time low of 4.2% in early 2023 to over 12.5% by the end of 2024, and expectations are for vacancy to remain elevated throughout the coming year.

The pace of completions in both the Dallas-Fort Worth and Phoenix industrial markets is expected to slow considerably over the near term.

Normalizing tenant demand, coupled with higher costs for land, labor, materials and new development financing, continues to weigh on construction starts in both markets. The forecast calls for annual completions to fall about 50% or more in 2025, giving the glut of recent supply additions time to digest.

Looking ahead to 2026, a further construction slowdown is expected, which could allow vacancies to begin to fall again, followed by an eventual reacceleration of rent growth.

While the wave of supply has driven a period of dislocation in both markets, the structural drivers underpinning industrial demand remain stout. Healthy demographics, an expanding local economy, nation-leading demographics and strong momentum in advanced manufacturing keep the long-term outlook healthy in both the Copper and Lone Star states.